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What hedging is and how to protect your portfolio — a complete guide. Understand put options, protective calls and portfolio hedging strategies.
Published by The Retail Trader · AUG 07, 2026 · Features
What hedging is and how to protect your portfolio — a complete guide. Understand put options, protective calls and portfolio hedging strategies.
Hedging means protecting your existing position from loss. It is like insurance — if you insure your house, you get paid if the house burns down. Hedging is the same — if the portfolio falls, the hedge will pay a profit.
Simple definition: > Hedging = insurance for your investment. If the portfolio falls, the hedge produces a profit — the loss is reduced.
Imagine you bought ₹5,00,000 worth of RELIANCE stock. You are bullish, but you fear it will fall after the results.
Without hedge: RELIANCE falls 10% → ₹50,000 loss With hedge: RELIANCE falls 10% → ₹50,000 loss on stock + ₹35,000 profit on hedge = Net loss ₹15,000
The hedge cut the loss from ₹50,000 to ₹15,000. Like insurance — you paid a premium, you got protection.
Setup:
• You hold RELIANCE stock (long position)
• Buy a RELIANCE PUT option (insurance)
• If the stock falls → the Put option pays a profit → the loss is offset
Example:
• RELIANCE at ₹2,500
• You hold 100 shares (₹2,50,000 investment)
• Buy: 2,400 PE @ ₹30 (insurance premium)
• Cost: ₹30 × 100 = ₹3,000
Scenario 1: RELIANCE falls to ₹2,300
Keep these three points in mind:
• Stock loss: 100 × ₹200 = ₹20,000
• Put profit: 100 × ₹70 = ₹7,000
• Net loss: ₹13,000 (instead of ₹20,000)
Scenario 2: RELIANCE rises to ₹2,700
Keep these three points in mind:
• Stock profit: 100 × ₹200 = ₹20,000
• Put loss: ₹3,000 (premium paid — expires worthless)
• Net profit: ₹17,000
Cost of the hedge = Premium paid = ₹3,000. This is your insurance premium.
Setup:
• You hold the stock (long position)
• Sell a CALL option (you receive a premium)
• Premium = Income (a little protection too)
Example:
• RELIANCE at ₹2,500
• You hold 100 shares
• Sell: 2,600 CE @ ₹40
• Income: ₹40 × 100 = ₹4,000
Scenario 1: RELIANCE stays the same or falls slightly
Keep these three points in mind:
• Stock: No change or small loss
• Call premium: ₹4,000 profit (retained)
• Net: ₹4,000 income ✅
Scenario 2: RELIANCE rises to ₹2,700
Keep these three points in mind:
• Stock profit: ₹20,000
• Call loss: ₹6,000 (when it goes above 2,600)
• Net profit: ₹14,000 (limited upside, but profit)
Covered call = Income strategy + a little downside protection. Upside is limited, but you get regular income.
Setup:
• You hold the stock
• Buy a PUT option (downside protection)
• Sell a CALL option (premium offsets the cost of the PUT)
Example:
• RELIANCE at ₹2,500
• Buy: 2,400 PE @ ₹30 (protection)
• Sell: 2,600 CE @ ₹40 (income)
• Net cost: ₹30 - ₹40 = +₹10 (FREE hedge!)
Benefit of a collar: Downside protected, upside limited, but the cost is very low or FREE.
Setup:
• You hold a diversified stock portfolio
• Buy a Nifty PUT option
• If the market falls → Nifty Put profit → portfolio loss offset
Example:
• Portfolio value: ₹10,00,000
• Nifty at 20,000
• Buy: 19,500 PE (monthly expiry) @ ₹80
• Lot size: 25
• Cost: ₹80 × 25 = ₹2,000 per lot
Hedge ratio: Portfolio value / (Nifty level × lot size) = ₹10,00,000 / (20,000 × 25) = 2 lots
Total hedge cost: ₹2,000 × 2 = ₹4,000
If Nifty falls 5% (19,000):
• Portfolio loss: ~₹50,000 (5%)
• Put profit: ~₹25,000 per lot × 2 = ₹50,000
• Net loss: ₹0 (fully hedged!)
Insurance cost: ₹4,000 per month (0.4% of portfolio).
The cost of a hedge should not be more than 0.5-1% of the portfolio. A hedge that is too expensive will eat your returns.
Rule 2: Always Hedge (Around Events):
• Before quarterly results
• Before Budget day
• Before election results
• Before RBI policy
• Before global events (US Fed, wars)
Event over → close the hedge. Don't let the premium go to waste.
100% protection is not possible. A hedge gives 70-80% protection. Accept that.
Hedging is LOSS prevention, not a profit strategy. The cost of the hedge is your insurance premium. Profit should come from the stock, not from the hedge.
Keep these four points in mind:
• Protective Put — Cost: 0.5-2% per month, Protection: Downside fully protected, Best For: Stock holders
• Covered Call — Cost: FREE (income), Protection: Limited upside, a little downside, Best For: Income seekers
• Collar — Cost: FREE or minimal, Protection: Both sides protected, Best For: Conservative
• Index Put — Cost: 0.3-0.5% per month, Protection: Portfolio-level protection, Best For: Diversified portfolios
"The market always goes up" — remember 2008, 2020, 2022. Without a hedge a portfolio can fall 30-50%.
ATM options are very expensive. Use OTM options (2-3% away) — they are cheaper and give sufficient protection.
The event is over, the hedge is still open → the premium is decaying. Close the hedge after the event.
A hedge is insurance. Do you expect profit from insurance? No. The job of a hedge is to prevent loss — not to make profit.
Keep these points in mind:
• 📌 HEDGING QUICK REFERENCE
• PROTECTIVE PUT:
• ✅ Long stock + Buy OTM put
• ✅ Downside protected, upside unlimited
• ✅ Cost: 0.5-2% per month
• COVERED CALL:
• ✅ Long stock + Sell OTM call
• ✅ You get income, upside limited
• ✅ Cost: FREE (income)
• COLLAR:
• ✅ Long stock + Buy put + Sell call
• ✅ Both sides protected, cost minimal
• ✅ Cost: FREE or near-zero
• PORTFOLIO HEDGE:
• ✅ Buy Nifty OTM puts
• ✅ Portfolio-level protection
• ✅ Cost: 0.3-0.5% per month
• WHEN TO HEDGE:
• 📅 Before quarterly results
• 📅 Before Budget day
• 📅 Before election results
• 📅 Before RBI policy
• 📅 Before global events
• RULES:
• 💰 Hedge cost 0.5-1% max
• 💰 Use OTM options (cheaper)
• 💰 Close after the event
• 💰 Perfect hedge impossible — 70-80% protection sufficient
• 💰 Hedge = insurance, not profit strategy
Keep these five points in mind:
• What Are Option Greeks?
• How to Read an Option Chain?
• Iron Condor Strategy
• What Is Risk Management?
• Portfolio Management Guide
The Retail Trader — educational market analysis. Not investment advice.
This article is for educational purposes only — no buy or sell recommendation, no claim of guaranteed returns, and no advisory. Rules, rates and mechanics are changed from time to time by the exchanges, SEBI and RBI, so verify every number yourself with your broker or the official source.